1) There is no theoretical justification for this prolonged policy experiment. No macroeconomic textbook I have ever read, no scholarly article, explains how keeping interest rates artificially low for several consecutive years while massively increasing the money supply "fixes" the economy.
2) There is no practical justification for this experiment. In a nutshell IF the policy worked THEN the economy would have recovered. This didn't happen. Indeed, after every recession in the preceding 70 years, the economy recovered quickly WITHOUT massive money printing and without keeping interest rates near zero. Only after the most recent recession, when central banks decided the cure was more hair of the dog, has the recovery been uncharacteristically anemic. In business, this would be taken as evidence of policy failure. In business, any CEO with Ben Bernanke's track record would have been fired long ago. Only in government is the solution to keep trying the same thing that hasn't worked. (An operational definition of insanity.)
3) Central banks have chosen: borrowers are winners; savers are losers, especially the elderly. How does a retiree get by when he planned on a 5% yield and now is lucky to get 2%? His income is down 60% from what seemed like a conservative plan, and he can no longer work. Ben Bernanke has sacrificed the elderly to business.
4) We have yet to pay the piper. Wealth is created when goods produced exceed goods consumed, not when printing presses produce fiat money. In time, when the economy eventually returns to health and there is no substantial cushion of excess capacity to damp prices, it is highly likely we will face massive inflation.
And if business invests in projects that are ONLY profitable if financed with very low cost money, what will happen to these investments when interest rates rise?

If too large a proportion of the fruits of production go to the top, and is saved, the bottom doesn't have enough to consume, and real investment opportunities are then not sufficient to absorb the savings.
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I wonder why the stock market is doing so well.

The West is not recovering properly because the East is consuming most of the world's economic growth... In the past, the US and Europe had few rivals to pitch for business... now they have lots of rivals (e.g. China)... The West is suffering from the textbook effects of economic competition... The Golden Age for Western economies is over, forever.

Increasing the money supply increases the money supply, that's for sure. However, what we really need, most of us, is an increase in wealth.

Central banks in Europe, Japan and the States have forced interest rates downward until, at least in America, banks can borrow from the Fed for zero interest. Japan announced last week it plans to DOUBLE the money supply over the next two years and hopes to drive inflation up to a whopping two percent. Europe, too, has revved up the printing presses -- and the current European rate of unemployment now tops 12%. As for America's money fueled stock and housing bubbles, all of this is fine for those who benefit from asset inflation. But, if the latest unemployment figures are to be believed -- and we'd be probably wise not to believe them -- the number of unemployed continues to increase.

Well, we've tried it all. Japan practically paved over the country with fiscal stimulus projects that left Japan about as badly off as ever -- but with a Godzilla-size national debt. Americans and Europeans have printed train loads of new money and the only thing one can say about the tepid American economy is that, at least, it is not as bad as that of Europe. Or Japan.

Maybe, then, the problem lies elsewhere then with monetary and fiscal policy. Maybe Paul Krugman, James Surwicki and all the rest are barking up the wrong tree. Maybe the answer to the economic malaise of the States, Europe and Japan is so fundamental, so politically incorrect and so irreversible that it is almost heresy to suggest. But, I'll suggest it all the same: We don't have enough people.

The Japanese are going away. Their population is falling, now, by almost one million a year. Their population is also aging and by the year 2025 one out of every three Japanese will be over sixty-five. A few of the implications of all this are: a) meager household formation (virtually the engine of growth) b) a mass diversion of resources from the economically productive population (the young) to an unproductive population (the elderly) c) a per capita increase in the national debt as population falls but debt increases. There really seems to be no way out for Japan.

Europe is a bit better off -- but only by a little. Native populations within the ECC are barely reproducing and, in fact, not even replicating themselves in most countries. This leads to a decline in household formation, etc. etc.

American rates of reproduction among the native-born has now fallen to 1.8 per couple. This leads to a decline in household formation . . . oh, wait . . . just reread the above.

We have, in the States, done everything we could to discourage a growth in population: abortion on demand and promiscuous birth-control stand out in this regard. But, in addition (and this is true lunacy!) we have simultaneously insisted that 1) higher education is essential; 2) higher education in America must be the most expensive on the face of the planet. (Is there any other reader who spots a disconnect in these last two facts?) Thus, kids just cost too much.

Human beings have come to be regarded as a sort of pollution. Thus, we have reams of indoctrination to be "green" in the public schools and virtually nothing that suggests "Babies are nice to have." There is, today, a great deal of anger toward the Baby Boomers on the part of the younger generation -- but they miss the essential point. The nation's financial difficult is not due to the Baby Boom but, rather, that the Baby Boom stopped! Had population continued unabated (see Roe) then there would have been a wide base with which to pay Boomer benefits, start new households . . . etc. etc.

People are not a hinderance to prosperity. They ARE prosperity. Given your choice, where would you locate your business -- Manhattan or Yucca Flats? How well has a 60% decline in population since 1950 served Detroit?

Those three areas of the world -- the States, Europe and Japan -- that seem mired in a non-ending economic malaise are those areas of the world that have, next to China, done the most to discourage population growth. And, now China is starting to face a bleak future from an increasing cohort of elderly and not enough workers.

As I say, it is heresy -- a gross violation of PC -- to argue that lack of people lies at the heart of our common problem. Even worse -- the problem is simply impossible to correct.

Low base rates are certainly the right policy - inflation paths prove that. If inflation were to fall much further in the US or eurozone, central banks would really have to explore how to effectively implement negative interest rates (e.g. with a major push towards official electronic currency on which varying negative rates can be applied).
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However, massive asset purchases are not a legitimate activity of central banks.
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We have already seen how government subsidies of student loans created an insane bubble (which is still to painfully collapse, wiping out universities & dislocating students as well as killing university towns and destroying wider demand).
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The Federal Reserve is now subsidizing mortgages (i.e. the instrument that rich people use to cut their income tax bill), driving another housing bubble (it ain't at bubble proportions yet, but that's precisely what introduction of subsidies will achieve).
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And the Fed is making big cash transfers to bond holders (yay! give money to those with so much wealth they don't want to consume or invest), fueling a crazy boom in the bond market (do you think 10 year bonds would be trading at 1.76%, if investors weren't buying them hoping for the FedRes or regulation-bound banks to buy them at an even lower yield & higher price?).
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In essence, rather than implement good monetary policy (which is just an exercise in moving base rates & minimal instruments to support market clearing of savings & investment), the Fed is actively diverting capital, expanding a massive balance sheet full of risk (losses on which would be inflationary if ever realized), driving crazy bubbles which will kill other investments & hurt long run growth, etc.
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We do need bold monetary policy. The eurozone (inflation 1.7% still close to target, having recently been above 2% target, and perhaps likely to rise if recent depreciation persists) might need to explore negative interest rates. If US inflation falls towards 1%, then even the Fed might need to consider negative nominal interest rates. The UK's BoE badly needs to end its extreme inflationary balance sheet interventions that are doing nothing for our economy's competitiveness.
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We do not need fiscally active, house-subsidizing but unaccountable central banks. We just need honest inflation targeting monetary policy.
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Ok, we also need wider financial sector reform to tackle leverage cycles, and we need structural reforms in many other areas, but those are different problems.
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QE and other economy-sized balance sheet interventions must end (unless implemented by an elected government, explicitly within the remit of fiscal policy, and with explicit taxpayer exposure to any losses that arise from such trading).

There cannot be demand for produced goods and services before production of goods and services. This is logically impossible even according to marxist logic of the new socialist man. production must logically precede consumption, even a pre school kid would understand this concept, modern pseudo science doesn't.

Average people in rich countries can eat healthy, buy gadgets, send kids to school, own cars, their home. What else do they need? What could businesses sell to them?
Not everybody has their own home. Then the problem is inequality...not growth.
Poor countries don't have all this staff... Well then concentrate on investing in poor countries, getting good returns: just what companies are now doing.

Just an idea: maybe in rich countries people wouldn't mind having some leisure time? What about this? This is where France's 35hours week makes sense.

Businesses are running out of ideas in rich countries. This could change with some new technology breakthrough which would create new demand. As it stands now, invest in poor countries, lower university tuitions,limit weekly working time and get more vacation!

1. Years of cheap finance mean that the majority of those >30 years have already bought a home. In the face of high unemployment and thus income uncertainty, these are not going to refinance or upgrade their homes.

2. High unemployment in the <30 demographic means there is no one with income to buy homes.

Hence, loan growth will be low, and consumption will be flat.

To escape, jobs must be created. Not the printing of fiat money. This brings us to the most important statement:

#3. While the limits of fiscal and monetary policy may have been reached, there is still much to be done on the supply-side.

E.g. slash regulation so that SME's can start a business without having a $100k overhead from day one for a tax and compliance lawyer. Etc.

It works just fine for those in charge of the system, and those they employ - a 'can't miss' situation for them. Does anyone else actually matter? What's good for the Wall Street elite is what's best for America - everyone knows that.

Low rates aren't doing much because the credit channel is blocked and saturated. We need to modify the central banks so they deal directly with the public not banks in order to bypass the the credit channel and allow stimulus to enter the economy and create demand.

I don’t think we will ever go back to the time when savers where winners because they accumulated wealth and borrowers had to pay the price for the money borrowed. Globalization is the process of taking wealth from those who try to accumulate it (working middle class) and give to those on low income to make them able to consume what they weren’t able before and in doing so generating higher tax collection to the state and profits to those who possess the means of production, the very rich.

In the old times during the cold war we had two different systems advocating for the working middle class, capitalism and communism, each one claiming to be the best to the interest of the working class. At that time the developed countries had the interest of generating well paid work for unskilled people and a welfare system to those who were incapable to produce. The collapse of the Soviet Union brought the end of communism as a viable alternative and capitalism now is the only system standing and that put an end to the ideological confrontation. Today the working middle class is alone without any political support.

Now capitalism doesn’t have to explain itself because it is the only game in town, so banks do whatever they like to pay high dividends to the shareholders and bonuses to the higher ups that generate the profits, even it is all fraud. Work has lost value because the capitalist can buy a machine to replace the worker or send the position to slave camps and Asia (Foxxcon). The sky is the limit and to be super rich is cool! The politicians are happy because they are well paid and have money to buy votes supported by a corrupted press. Is all business and one hand washes the other. Even the socialists and former communists are happy because they have achieved what they always wanted: the destruction of the savvy, frugal, principled, wealth keeping middle class and replaced it with the poor, uneducated, cheap mob that spends money with the things they weren’t able before.

Money is cheap, spending is good, saving is out, and ignorance is bliss.

But there was a problem…the model was unsustainable because it was based on fraud. Reality is that people are only entitled to what they produce and machines don’t consume, they don’t eat, they don’t pay rent. If the worker is replaced by a machine consume will fall. Importing dysfunctional people is not a solution because they only consume, they don’t produce and when they do is too little. The ends don’t meet!!!!And here we are…2013, six years after the financial collapse and our ruling elite still don’t know what to do and still refuse to accept reality.

I say let the rotting banks fail and make the shareholders pay for their immorality, educate the new comers so they can see day from night, reward the working middle class because we are the ones who build wealth and motivate the lower classes to move up.

Interest rate and market manipulation by central banks always ends in sorrow. It has NEVER worked out. There is not one example of it turning out ok. So please stop it. Keynes is truly dead and gone now.

"The Federal Reserve has been buying mortgage-backed bonds as a way of forcing down yields and thus reducing the cost of home ownership. " This is BS. When the interest rates come down, the price of the home goes up. This is actually what the FED wants, but it is just one more misguided manipulation of the market that will have an unintended consequence.

Like Tao1 below says, the western monetary system is reaching its final end game. Unfortunately, people within the system will never make any real reforms. The current system will have to burn down before anything better can rise out of the ashes. The oh-so-important meetings by such oh-so-important people at Davos, Jackson Hole, and other neat places will then finally be irrelevant. Too bad there will have to be a lot of suffering before the present antiquated and destructive system finally goes away.

The benefits of the QE liquidity and cheap money are exaggerated. Low rates are making mortgages cheaper but perhaps reducing the supply of financing. Why would anyone lend money at 3.5% on a 30 year fixed rate knowing that at some point short term rates will increase and result in a principal loss on the loan. Property is picking up more due to the decline in supply as the excess inventory built up during the bubble has declined. The unusually low short term rates are increasing prices to the average consumer in a number of areas such as college tuition and insurance (home, auto) due to the lower returns on endowments and returns on premiums held pending claims. As far as corporate America, low rates have encouraged share repurchases via debt (interest rates are the only real cost) rather than business investment (interest rates are a small part of the total cost)as a cheaper/easier way to increase EPS. These fixed income investments such as bond funds might very well be a bubble as they will lose significant principal value if rates ever increase as they almost certainly will. There is also the issue of lost consumer purchasing power of perhaps $200b/year due to lost income by savers due to the lower rates. Serial bubbles are no way to grow an economy.

Progreso Yucatan; HSBC Mexico recently had lovely young ladies on the sidewalk handing out brochures promoting mortgages at 8.75%. Problem is that hardly anyone can qualify. The Central Bank of Mexico says the banks should lend more. There is plenty of pent-up demand for housing, but the folks who need it can't qualify for a loan.

I'm an economist and have lived in Mexico for 14 years. What I see
is a bewildering array of obstacles for any entrepreneur or investor.

If I ran the Central Bank, I would send my staff out in the real world to see firsthand how difficult it is to open a restaurant...or some
other low tech business.

The Good News

A few enterprising young foreigners and Mexicans have recently discovered the Yucatan,and are running successful internet based
businesses. No building permit or planning permission required.
No need to make umpteen visits to the Palacio. Very low overhead.

The internet will change the economy of the Yucatan.

If the young people of the Yucatan were fluent in english, the call centres would be here...not Bangalore.

Boosting growth in conventional terms will be difficult. But there will be growth in knowledge intensive industries that will take time
to appear in the official statistics.

The Central Bank should have a visit with Telmex and Carlos Slim. Growth will depend on the expansion of affordable reliable high speed internet outside the high density urban areas.

"Why do people not want to borrow cheap capital to build or grow a business?"

To whom would they sell? What industry exists today in America that lacks capacity to meet demand? Even as housing construction revives, it does so using idle building capacity.

Previous periods of exceptional economic growth were prompted by incessant demand. From 1919 to 1929 capital flowed into the new industries of automobiles, radios and electric household appliances. Still more capital was lent to the consumer to buy these same products while the consumer himself frequently benefitted as both user of the new goods and worker who produced them.

The next subsequent period of prosperity, from the early Postwar right into the 1980s, was marked by industry-wide growth to satisfy immense popular consumption. Most of all, housing boomed during these years as returning veterans provided almost limitless demand. The same thing occurred with automobiles, unavailable at any price during the war years. This demand was sustained decade after decade by high rates of family formation as the war generation paired off and started their, by our standards, large families. And, those large families, in turn, created an insatiable demand for new schools, clothing, recreation, additional housing and so on in a sort of virtuous circle. (You are probably too young to remember the late 1940s and 1950s and into the 1960s when entire suburbs materialized out of nowhere and blossomed in two or three years into substantial cities.) Industry labored mightily to satisfy demand and new capacity in all fields came on line. (For instance, in 1945 not a single private TV set was for sale anywhere in North America - a new electronics industry had to be summoned into existence and it employed countless thousands.)

Now, with household formation weak and the burden of an elderly cohort increasingly sapping resources without creating a need for new productive facilities -- whatever else a nursing home may be, productive it is not -- where is the demand for new capacity supposed to originate?

Demand is always infinite, everyone wants a yacht, everyone wants a mansion. The only thing that limits peoples living standards is supply and is the only difference between a third world country and a developed one is the ability to produce goods and services.